2011 (2) TMI 1541 - AT - Income Tax

Summary

Issues Involved:

1. Deduction of interest u/s 36(1)(iii) for advances to subsidiaries.
2. Deduction of interest u/s 36(1)(iii) for acquisition of mutual funds.
3. Change in method of accounting for commission income.
4. Disallowance of bad debts.

Summary:

Issue 1: Deduction of interest u/s 36(1)(iii) for advances to subsidiaries

The revenue contested the CIT(A)'s decision to allow the deduction of Rs. 7,48,309/- u/s 36(1)(iii) of the I.T. Act for interest on borrowed funds advanced to subsidiaries. The AO argued that the funds were not used for the assessee's business. However, the CIT(A) and ITAT upheld the deduction, referencing the Supreme Court's decision in S.A. Builders Ltd. vs. CIT, which allows such deductions if the advances are made as a measure of commercial expediency.

Issue 2: Deduction of interest u/s 36(1)(iii) for acquisition of mutual funds

The revenue also contested the CIT(A)'s decision to consider Rs. 35,83,074/- as the cost of acquisition of mutual funds. The AO had disallowed the interest deduction u/s 36(1)(iii) since the borrowed funds were used to acquire mutual funds, not for business purposes. The CIT(A) and ITAT upheld the AO's decision to disallow the interest deduction but allowed the interest to be capitalized as part of the cost of acquisition of the mutual funds.

Issue 3: Change in method of accounting for commission income

The AO added Rs. 2,53,30,692/- to the assessee's income, arguing that the change in accounting method was not bona fide and aimed at reducing tax liability. The CIT(A) deleted the addition, stating that the change was bona fide and reflected the true income. The ITAT remanded the issue back to the CIT(A) for fresh consideration, emphasizing the need to examine the agreement between the assessee and its clients to determine the point at which the income should be recognized.

Issue 4: Disallowance of bad debts

The AO disallowed the deduction of Rs. 84,27,944/- claimed as bad debts, arguing that the income was not realized. The CIT(A) allowed the deduction, stating that the assessee had fulfilled the conditions specified in section 36(2) and the amount written off was deductible u/s 36(1)(vii). The ITAT upheld the CIT(A)'s decision, confirming the deduction of the bad debts.

Conclusion:

The ITAT partly allowed the revenue's appeal for statistical purposes and remanded the issue of the change in the method of accounting back to the CIT(A) for fresh consideration. The ITAT upheld the CIT(A)'s decisions on the other issues, confirming the deductions for interest on advances to subsidiaries and bad debts while allowing the capitalization of interest as part of the cost of acquisition of mutual funds.